Live like royalty for under $200 per month

LAS CRUCES - Savvy buyers can live like royalty for under $200 per month. Homebuyers are inherently payment conscious. Their typical mantra is “the lower the better.” To that end, some purposefully seek out homes priced at the lower end of the spectrum. Few, if any, are aware that there’s another and sometimes even better approach to achieving a low monthly payment; buy a property that generates income.

To illustrate how purchasing a two, three or four-unit income property can help buyers reduce their monthly housing obligation, I turned to statistics from the Las Cruces Association of Realtors. According to association records, a total of 224 Las Cruces area single-family homes sold for a price of $120,000, or less, through Nov. 17 of this year. The average sales price was $95,000.

During the same period, buyers snatched up four duplexes, four triplexes, and six fourplexes. When averaged, the numbers revealed that the typical three-unit income property generated income of $450 per month per unit and sold for $169,150. So how can purchasing a property for $169,150 result in a monthly payment that’s lower than the payment associated with the purchase of a $95,000 property? It’s easy. Have the tenants pick up the bulk of the tab.

The key to making the plan work is FHA financing, which is available to owner occupants and investors alike. For owner occupants, the interest rate and down payment requirements for two-, three-, and four-unit properties are the same as they are for single-family homes – as long as the borrower lives in one of the units. As of Nov 17, the required down payment was 3.5 percent of the purchase price, and the annual interest rate was 3.75 percent. Investor loans carry far less favorable terms.

In our scenario, the purchase of a $95,000 home would require a down payment of $3,325 (3.5 percent of $95,000), plus closing costs of approximately $3,000. The monthly payment, including principal and interest, property taxes, plus homeowner’s and mortgage insurance, would be around $625.00. The down payment and monthly payment on the three-unit property would be approximately $6,865 and $1,095, respectively. Since the closing costs on the investment property are essentially the same as for the $95,000 home, the additional cash required to purchase the higher-priced property amounts to just over $3,500.

The major benefit to purchasing the three-unit income-producing property is that the remaining two units each generate income of $450 per month, for a total of $900. When subtracted from the $1,095 monthly payment, the rental income offsets all but $195 of the borrower’s monthly obligation.

While the numbers are fairly straight forward, there are some important elements to take into consideration. What if the property is vacant for a short time? How about repairs? Then there’s there the income tax on the rental income. On the positive side, owners may save on taxes by deducting from the rental income depreciation of the building and repair expenses. Other positive aspects of using FHA financing are that all or part of the borrower’s down payment and closing costs can be in the form of a gift from a relative or other approved entity, and a large portion of the rental income can be added to the borrower’s monthly income for qualifying purposes.

If a low monthly payment is on your wish list, this approach may be just what the doctor ordered.

See you at closing!

Gary Sandler is full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. Gary can be reached at (575) 642-2292 or gary@garysandler.com